2010 FRQ’s for Macroeconomics.
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1. Assume that the United States economy is currently in long-run equilibrium.(a) Draw a correctly labeled graph of aggregate demand and aggregate supply and show each of the following.(i) The long-run aggregate supply curve(ii) The current equilibrium output and price levels, labeled as YE and PLE, respectively
(b) Assume that the government increases spending on national defense without raising taxes.(i) On your graph in part (a), show how the government action affects aggregate demand.
Unemployment rate will DECREASE. Real GDP will INCREASE. Businesses are producing MORE Goods/Services so they will need MORE people to product those goods/services. (The ACTUAL unemployment rate will be LESS THAN (or Below) the Natural Rate of Unemployment)
(c) Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending.(i) How will the short-run aggregate supply curve in the new long-run equilibrium compare with that inthe initial long-run equilibrium in part (a) ? Explain.
(d) In order to finance the increase in government spending on national defense from part (b), the government borrows funds from the public. Using a correctly labeled graph of the loanable funds market, show the effect of the government’s borrowing on the real interest rate.
Market for Loanable Funds
Quantity of Loanable Funds
(e) Given the change in the real interest rate in part (d), what is the impact on each of the following?(i) Investment(ii) Economic growth rate. Explain.
Investment: As a result of the increase in the real interest rate, business will borrow LESS money to replace capital goods, buy new capital goods, expand factory production or build new factories.
Economic Growth: As a result of decreased investment spending, the nations CAPITAL STOCK will DECREASE thereby DECREASING future economic growth
Quantity of Money
(d) Identify an open-market operation the Federal Reserve could use to keep the nominal interest rate constant at the level that existed before the drop in credit card fees. Explain.
3. A United States firm sells $10 million worth of goods to a firm in Argentina, where the currency is the peso.(a) How will the transaction above affect Argentina’s aggregate demand? Explain.
(b) Assume that the United States current account balance with Argentina is initially zero. How will the transaction above affect the United States current account balance? Explain.
(c) Using a correctly labeled graph of the foreign exchange market for the United States dollar, show how a decrease in the United States financial investment in Argentina affects each of the following.(i) The supply of United States dollars(ii) The value of the United States dollar relative to the peso
Quantity of Dollars
(d) Suppose that the inflation rate is 3 percent in the United States and 5 percent in Argentina. What will happen to the value of the peso relative to the United States dollar as a result of the difference in inflation rates? Explain.